Willingale v International Commercial Bank Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE STAMP,SIR JOHN PENNYCUICK |
| Judgment Date | 15 March 1977 |
| Judgment citation (vLex) | [1977] EWCA Civ J0315-1 |
| Date | 15 March 1977 |
| Court | Court of Appeal (Civil Division) |
[1977] EWCA Civ J0315-1
In The Supreme Court of Judicature
Court of Appeal
(Appeal by the Crown from order of Mr. Justice Walton, London, March 12, 1976.)
Lord Justice Stamp
Lord Justice Ormrod and
Sir John Pennycuick
MR. MICHAEL P. NOLAN. Q.C. and MR BRIAN J. DAVENPORT. (instructed by the Solicitor of Inland Revenue) appeared on behalf of the Appellant (Appellant).
MR F. HEYWORTH TALBET. Q.C. and MR J.R. GARDINER. (instructed by Messrs. Travers, Smith, Braithwaite & Co.) appeared on behalf of the Respondents (Respondents).
This is an appeal by the Crown from an order of Mr. Justice Walton dismissing an appeal by the Crown by way of Stated Case from a decision of Commissioners for the General Purposes of the Income Tax. The Commissioners had allowed appeals by the taxpayer against assessments to Corporation Tax for the six-month accounting period to December 31st, 3967, and the years ended respectively the 31st December, 1968, 1969, and 1970. The case is reported in 1976 1 W.L.R. 657, and since the facts are set out in the roped it is not necessary to recite them.
Let me say at once that I think some confusion has been introduced into the case by the form in which the Commissioners stated the question which falls to be determined: "Whether in ascertaining the profits of I.C.B in the case of bills (Including promissory notes) discounted or bought by I. C.B. and held until maturity or sale a proportionate part of the expected profit on maturity or sale referable to the accounting periods in question fell to be included in the computation of the assessable profits of I. C.B. for those periods?" So to pose the question leads to confusion, because in computing the profits of a business you do not bring in as separate items and add together the profits on the several profitable transactions of the taxpayer and deduct there from the aggregate of the lasses suffered on those transactions which wore unprofitable. If the computation falls to be made on a receipts basis you bring into account on the credit side not your profits, but your receipts. If the computation falls to be made on what iscalled an earnings basis you place on the credit side not the profits which you have earned, but, broadly, the amount of money you have earned.
The relevant statutory provisions of cases of Schedule Dare set out in Section 108 of the Income and Corporation Taxes Act. The tax is "charged in respect of:- (a) the annual profits or gains arising or accruing - (i)……(ii) to any person residing in the United Kingdom from any trade, profession, or vocation ……."
And so the question which falls to be determined is whether in computing the profits or gains of the taxpayer (I. C.B.) arising or accruing in a relevant year or accounting period, there ought to be brought into the computation on the asset or credit side an appropriate part of the discount oh bills held by the taxpayer at the end of the year which have not reached maturity. It is the taxpayer's contention that such discounts represent a profit which in accordance with income tax law is not to be anticipated, and that only on maturity does a discount fall to be brought into account. In its commercial accounts the discount is properly treated as accruing over the whole period during which the taxpayer is the holder of the bill, and it is not in issue that this method of computing the profits gives effect to the correct principle of commercial accountancy. The Revenue submits that it is likewise correct for the purposes of Case 1, and that in making up the Caso1 account the amount of discount referable to each year is properly brought into account on the credit side of the account for that year, and that this in no way conflicts with the principle of income taxthat you may not anticipate a profit, but la an appropriate step in the process of finding out what wore "the profits or gains" of the taxpayer "arising or accruing" in each year.
Before proceeding with this judgment it is necessary to emphaise three things which are, I think, fundamental to the consideration of the question whether in preparing its commercial accounts in the way it did the taxpayer transgressed the income tax rule that you may not be taxed on an anticipated profit.
In the first place, the profits or gains of a trade are, and have been for I know not how long, usually computed for the purposes of Case1 on an earnings basis. And so if in the course of the trade a sum of money is earned, but has not been paid during the accounting period, that sum is nevertheless brought into account on the credit side. So far as I know, it has never been suggested that so to do is to contravene an income tax principle that you may not anticipate a profit. If in the event the sum is not recoverable it comes back on the debit side of the account in some subsequent accounting period as a bad debt. And, as I will endeavour to show hereafter, even contingent debts may fall to be brought in on the credit side of the account without infringing any such principle. Hare the liability under the bills is not contingent.
Secondly, I would emphasise that the taxpayer has not been found to be carrying on the business of acquiring bills of exchange for the purpose of re-sale at a profit. Its business is that of acquiring bills of exchange and holding them until maturity, and that is the basis upon which the Crown seeks toassess the tax. It berrows "short" at a lower and lends "long" at a higher rate of interest. And so you find on the debit side of the account the interest which it pays and on the credit side the discount which it received during the years, and in its commercial accounts the discounts which, though not yet received or receivable, are treated as having "accrued". Although for business reasons it may be, and sometimes is, convenient to sell bills before they reach maturity, there is no finding that the taxpayer carries on the business of buying bills of exchange with a view to resale at a profit. And so for present purposes, even If bills can properly be described as stock-in-trade, they are not the stock-in-trade of a trader who buys bills of enchange with a view to re-sale. A trader who is buying bills of exchange with a view to resale at a profit would, so I would have thought - though I know nothing of such a business - prepare his commercial account by bringing in on the debit side of the account the amount laid out in the purchase of the bills during the year, and on the credit aide the amount of sales during the year and the cost of bills unsold at the end of the year. This is not the way this taxpayer prepared its commercial accounts which it is common ground wore prepared on correct commercial accounting principles. In the account of the trading profit no account is taken of the cost of acquiring bills of exchange, and no account is taken of money received on maturity in respect of the capital content of the bills.
Thirdly, I would say something of the nature of those discounts. The discounts at which the payment for the billswas made or the premiums at which they were made payable were not calculated by reference to the degree of risk of the bills not being met on maturity. The amount payable at maturity represents the amount advanced, plus interest at a commercial rate compounded annually over the period during which the bills were to matures (see exhibit 6 to the Stated Case), Accordingly, the discount or premium was, as Lord Greene, Master of the Rolls, put it in Lomax -v- Peter Dixon (1943) All.E.R., at p.262, "the reward and in the normal case (since such bills do not as a rule carry interest) the only reward which the person discounting the bill obtains for his money". In C.I.R. -v- Thomas Nelson and Sons Ltd. (22T.C. 175, at p. 179) Lord Normand in the Court of Session described the premiums as part of the consideration given by the berrowers for the Use of the capital lent to them, and, quoting Bell's Dictionary under the definition of "Interest of Money", "the creditor's share of the profit which the berrower is presumed to make from the use of the money". So regarded, I see no objection in the law relating to income tax to treating the reward or consideration as being earned and accruing over the period while the money advanced is outstanding.
Each bill creates a present obligation to pay a sum of money on a future date. So much of that sum as represents repayment of capital finds no place in the Schedule D computation. So much of it as represents interest must at some point of time be brought in to the credit side of the computation and for this purpose must be disentangled from the principal content of the amount payable at maturity. Theprincipal and discount can be disentangled, because the principal is the amount paid for the bill and the discount represents interest compounded annually at a fixed rate over the whole period of the bill. Similarly, the amount of discount attributable to each year over the period until maturity can be readily ascertained. This applies whether the bill be expressed in sterling or some other currency.
In its commercial accounts the taxpayer brought into the count each year a sum representing the proportion of the discount attributable to that year. In effect it treated the capital content as having been laid out at the stipulated rate of interest and earning interest at that rate notwithstanding that the payment of the interest is deferred. In a computation made on an earnings basis this appears to be unobjectionable, and no more anticipates a profit than does the inclusion on the credit side of the account of any other sum which has been earned, but not yet paid. The holder of the bill has been out of his capital...
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